A patent provides a set of exclusive rights granted by a government or territory to the patent owner the inventor or their assignee for a period of time in exchange for a detailed disclosure of the invention. For the patent owner, a granted patent allows the owner to stop third parties from making, selling, using, or importing products covered by the patent, thereby helping the owner protect its market share.
If the U.S. Patent and Trademark Office delays its examination of a patent application beyond certain deadlines, the patent term may be extended beyond 20 years from earliest filing date. This type of extension is known as a patent term adjustment. A patent term adjustment can also be provided for some pharmaceutical inventions if pending U.S. Food and Drug Administration approval holds up marketing.
A design patent protects the ornamental appearance of an article of manufacture. The ongoing Samsung versus Apple case presents a well-known example of the value of design patents. Design patents have a term of 15 years from the date of grant and aren’t subject to patent term adjustment.
The Right to Stop Others
When a patent expires the owner loses the right to stop others from making, selling, using, or importing products covered by the patent, thus allowing competition to enter the marketplace. Competitors can then copy the patented invention without fear of a lawsuit. Nevertheless, after the expiration of the patent, if the patent owner learns of infringing activity that occurred before the expiration of the patent, the patent owner can still sue to recover damages up to six years before the date of bringing suit for infringement (minus the time between expiration and bringing suit).
If the patent owner has licensed some or all of its patent rights, any royalty income tied to the patent rights will cease upon expiration of the patent. It’s against public policy to require a licensee to pay a royalty based upon a patent after the patent expires.
Revenues will drop
Knowing the date that a patent will expire, CFO’s must appreciate that revenues will decrease. Finance chiefs must plan ahead for that drop by advising the rest of senior management that the company needs to find alternative sources of revenue or cut costs to maintain profitability.
On the other hand, anticipating the loss of patent exclusivity may stimulate the patent owner to invest in research and development of alternative revenue sources. The CFO should recognize this anticipated cost from at least a balance sheet and profitability standpoint.
Mitigating the Loss
The good news, however, is that there are strategies for mitigating the loss caused by patent expiration.In anticipation of the expiration, for instance, the patent owner could acquire rights to patents offered by third parties, which may have a longer lifetime and which would be infringed by the sale of the patented product. So if a competitor waits until the patent owner’s patent expires, it may still infringe the newly acquired patent.
Since the expiration date of a patent is generally a fixed date, the patent owner should regularly file additional applications for improvements to the patented subject matter. This way a continuous stream of patents will be issued covering the improvements and thus continuing to challenge competition.